Here’s Why I Wouldn’t Buy Stitch Fix Shares

Author: Tim Phillips

Date: June 12, 2024

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Online fashion provider Stitch Fix Inc (NASDAQ: SFIX) saw shares finish down 15.5% as the company swung to a sizeable loss in its latest quarter.

Tim’s Take:

Stitch Fix has often been highlighted as one of the disruptors of the online fashion and styling industry. 

Yet, instead of just selling items like a traditional online retailer, what Stitch Fix does is provide clothing for sale or rental – with the latter being provided as a subscription service.

CEO and founder Katrina Lake started the business in 2011 and listed the business in 2017. The company also deploys a unique proprietary algorithm that personalises styling/purchase suggestions for users.

The latest earnings disappointment comes as a blow to the longer-term story. The company reported a net income loss of US$44.5 million in its latest fiscal quarter versus a US$7.2 million net income profit in the year-ago period.  

First, some of the positives from the report. Gross margin improved to 44.9% from 44.1% a year ago.

The company’s “Trending For You” launch in June has also captured more interest as Stitch Fix expands its feed-based shopping experience. Active clients also rose to near 3.5 million, which was up 8.8% year-on-year.

Lack of a unique story

Yet, somehow I don’t find the business that compelling as an investment. Selling, General & Administrative (SG&A) expenses are up to 48.1% of net revenue – compared to 43.7% in the year-ago quarter.

Stitch Fix costs

Source: Stitch Fix Q4 fiscal 2020 shareholder letter

Stock-based compensation made up a large portion of that, as it tends to with technology companies. Yet the market doesn’t value Stitch Fix as one. 

Trading at just 1.6x price-to-sales (PS), even traditional athleisure retailer Lululemon Athletica (NYSE: LULU) trades at 10x.

To me, the Stitch Fix platform services a niche and, obviously, the company is suffering as less people require blazers/jackets/blouses etc. amid lockdowns.

Yet even if there is a recovery, investors are betting big on Lake and her team to deliver on the digital front. 

That takes a leap of faith in a world where large fashion retailers are nurturing their own direct-to-consumer strategies (take Lululemon and Nike Inc (NYSE: NKE) as prime examples). 

Beyond the snazzy technology and new initiatives, to me Stitch Fix on the surface looks like a typical online platform/brand aggregator.

As we all know, just because a disruptor shakes up an industry, doesn’t mean it can’t be disrupted itself in the future. It’ll be an interesting business to watch going forward but I’ll be sitting on the sidelines to watch it unfold.

Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.

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About the Author: Tim Phillips